Hedge Funds May Fall to $1 Trillion by Mid-2009, Citigroup Says

Date: Tuesday, November 18, 2008
Author: Saijel Kishan, Bloomberg

Hedge-fund assets may fall to about $1 trillion by the middle of next year, a decline of almost 50 percent from their peak in June, because of market losses and client withdrawals, Citigroup Inc. said in a report.

Managers are likely to see investors, led by funds of funds, pull 20 percent of their money, Tobias Levkovich, an analyst at the New York-based bank, wrote yesterday. Funds of funds are middlemen who select hedge funds for their clients.

``The so-called `Swiss hot money' wants out and funds are responding,'' Levkovich wrote, referring to Swiss investors who have a shorter investing period than pension funds. ``Citi's credit analysts estimate that hedge funds have raised cash to roughly 40% of assets already in anticipation of known redemptions and possibly unanticipated demands from investors.''

Hedge funds lost an average of 16 percent this year through October, according to data compiled by Hedge Fund Research Inc., as stock and commodity markets tumbled and lending tightened. The industry has lost money in only one year -- a 1.45 percent decline in 2002 -- since the Chicago-based firm began tracking returns in 1990.

Future returns may be muted by the reduced use of borrowed money, according to the Citigroup report.

``The future of the hedge-fund industry looks set to be one in which leverage will not be used as aggressively, partially as a result of recent losses but also because the prime brokers will not provide it easily,'' Levkovich said.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

Regulatory filings last week by 38 hedge funds with more than $1 billion in assets each show that selling and market declines cut the value of their reported holdings by about 30 percent to $273 billion.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net